Analysis: Downtown housing development

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A powerhouse real estate partnership that includes Griffis/Blessing, Culebra Properties (a Lane family entity) and Nor’wood Development Group recently broke ground for The Cascades, a 184-unit downtown apartment development.

Situated on a half-block parcel on the northeast corner of Cascade Avenue and Rio Grande Street, the complex will, according to a memorandum sent to potential project investors in 2017, “include a mix of urban one bedroom/one bath, standard one bedroom/one bath and two bedroom/two bath apartments, averaging 745 square feet.”

Nor’wood will own 31 percent of the project and be the “controlling member.”

Griffis/Blessing and Nor’wood have, in aggregate, more than 70 years of experience investing in the Pikes Peak region. They share a long-term perspective, and have been willing to acquire and hold land for many years before developing it.

The Cascades is the second major downtown apartment complex to be built by the two partners. The first, a 169-unit complex on the southwest corner of Wahsatch and Colorado avenues, is scheduled to open early this year.

Nor’wood and Griffis/Blessing are also partnered in the 240-unit Mesa Ridge apartment development in Fountain that was completed in 2012. It’s a distinctively suburban development, spread through 11 buildings with 84 one-bedroom, 132 two-bedroom and 24 three-bedroom units.

But like the Wahsatch and Cascade projects, it was a bold bet on an uncertain future, since no apartment complexes had been built in Fountain since 2004. According to the project website, available apartments range from $1,075 for a one-bedroom to $1,660 for a three-bedroom.

Background

A limited liability corporation created by Griffis/Blessing bought the vacant 55,830-square-foot Cascade property in 2007 for nearly $1.4 million. It was a relatively small, mildly speculative play for the company, which has sponsored many such investment vehicles since Colorado College graduates Ian Griffis and Buck Blessing founded it in 1985.

“They’ve been very successful with those kinds of deals,” said Colorado Springs real estate broker Tim Leigh. “Their investors have done very well. If they want to raise money for a project, they have no problem. That property was probably bundled with a bunch of others — it might not make sense to create a partnership for such a small acquisition.”

Why did Griffis/Blessing and Nor’wood decide to build two similarly sized complexes in rapid succession?

Principals and senior managers of both companies did their homework, visiting comparable cities with burgeoning downtowns, hoping to learn from their experience. They also drew from Griffis/Blessing’s experience in managing an apartment portfolio of more than 9,000 units in both urban and suburban settings.

First, they had to determine whether there would be a market for 350 new units, apartments specifically designed for urban living. For example, the “urban one bedroom, one bath” units are actually studios. There are no three-bedroom units and no free flat parking — each complex has underground parking. Compared to the partners’ Mesa Ridge suburban complex which includes a clubhouse and a resort-style pool, residents will have less space, pay more per square foot and have fewer on-site amenities, but they’ll be steps away from downtown’s many attractions.

“Griffis/Blessing has worked with Nor’wood for several years studying the urban housing market in downtown Colorado Springs and designing urban rental housing to address the recent popularity of downtown living,” according to the investor memo. “In its recent ‘Market Study and Recommendations on the Colorado Springs Downtown Apartment Market,’ Apartment Appraisers and Consultants [a Denver firm] projects demand for downtown apartments of 200-300 units per year with rental rates averaging nearly $1,600 per month.”

Currently, available rentals in central Colorado Springs, as estimated by rentjungle.com, average $975 for a one-bedroom unit. The Downtown Colorado Springs Market Assessment, prepared two years ago by Progressive Urban Management Associates [another Denver firm] for the Downtown Partnership, forecast a growing downtown market.

“New apartments being built in downtown Colorado Springs are planned to be mid-tier and luxury apartments, with starting rents expected between $1,100 and $1,300,” according to the PUMA report. “This will address a critically underserved niche within downtown, where mid-tier units are extremely limited. Housing in downtown is at a pivotal point. New housing product will shed light over the next few years on what types of product and price points the market will support in the downtown core.”

Griffis/Blessing President and COO B.J. Hybl said interest in the Wahsatch project has been good.

“We won’t have product available for another few months, so we haven’t begun lease up, but we do have a waiting list,” he said.

 Financing the deal

As Griffis/Blessing’s investment memo notes, this deal is riskier than the company’s typical “fix and flip” apartment acquisitions.

“These risks include construction cost control, interest-rate fluctuations during construction and prior to placement of permanent debt, market acceptance and absorption of a new product type, the lack of control in a joint venture, and the possibility of limited additional capital contributions,” the memorandum said.

To mitigate the risks, Griffis/Blessing sweetened the pot for its investors, offering 16-18 percent projected annual average returns.

Other facts gleaned from the report:

• Capitalized cost contingency to provide for possible cost overruns: 7 percent

• Preferred return: 10 percent

• Construction, lease up and stabilization: three years

• Operations and sale: 10 years

• Total holding period: 13 years (or less, depending on the market)

• Projected average annual return to investors: 16-18 percent

• Projected multiple: 2.3-2.5 times equity invested

• Total capital raised: $5.5 million

• Total already invested by partners: $11.3 million

So what can go wrong?

“It’s amazing to me the interest that investors have in apartments, with cap rates so low. Is this sustainable?” said Andy Oyler at Quantum Commercial Group. “I’m also amazed by the low vacancy rates and high rental rates, but I think Colorado Springs is becoming cooler and more appealing to Millennials. There’s just an enormous demand for downtown housing and not much supply.”